In July, the academy was one of 154 colleges in California that lost eligibility for the state-funded grants for those two years because their student-loan default rates were too high or their graduation rates too low. The action was the result of a June 2012 state law.

The academy was disqualified because its 2010 graduation rate was 29.2 percent, just below the 30 percent cutoff. It would not have failed based on its loan-default score.

The academy filed a lawsuit against the California Student Aid Commission, which administers Cal Grants, seeking reinstatement into the program. It said the commission was required to use the academy's most recent graduation rate published by the U.S. Department of Education - and that was 34 percent for 2011, a passing grade.

The commission, however, said the 2011 rate was preliminary and it was required to use the 2010 rate because it was the most recent number that had been verified by the Education Department.

After it was expelled from the program, the academy said it would provide scholarships to students to make up for lost Cal Grants. Students who were new to the school last fall were ineligible for any Cal Grants; continuing students could receive 80 percent of the normal amount. The academy estimated that 100 new and 350 returning students would have been eligible for grants in 2012-13; it says it spent $1.3 million on replacement scholarships.

The lawsuit sought to reinstate the academy's eligibility in the Cal Grant program for 2012-13 and 2013-14 and to recover attorney fees and other "legally and equitably appropriate" relief.

The commission originally banned schools that missed the cutoff for two years because that is the way it interpreted the state law. However, the Legislature passed a bill in August making it clear that a college that missed the mark would be banned for one year but could be readmitted the following year if it got its graduation and loan-default rates back into compliance.

Even though the academy would have qualified for 2013-14 grants based on its 2011 graduation rate of 34 percent, the commission was planning to keep it out of the program for a second year because its 2011 rate still had not been made final by the Education Department, according to the academy's attorney.

In an oral ruling, Judge Peter Bush granted the academy's petition, according to lawyers for both sides.

"We will be taking a look at the judge's decision before taking next steps," says Patti Colston, a spokeswoman for the commission. The order "has not been signed. Both parties have a chance to weigh in. The judge can take into consideration comments before he makes his decision final," she adds.

Rebecca Delgado, a vice president with the academy, called the decision "a win-win for California and for students pursuing their dream of a career in a creative field. The state's businesses need a skilled workforce to help their companies continue to innovate and grow, and as a result of this decision, Academy of Art University students will be able to continue their education with the financial support they were counting on."